Moneycontrol
Apr 05, 2013 04:12 PM IST | Source: CNBC-TV18

Nifty rebound unlikely; may even test 5320: PhillipCapital

The probability of the Nifty declining further from current level is quite high, feels Vineet Bhatnagar, Managing Director, PhillipCapital. If the Nifty falls below 5550, it could slide all the way to 5320 this month, he said in an interview to CNBC-TV18.


The probability of the Nifty declining further from current level is quite high, feels Vineet Bhatnagar, Managing Director, PhillipCapital. If the Nifty falls below 5550, it could slide all the way to 5320 this month, he said in an interview to CNBC-TV18.

Also Read: Don't see Nifty below 5550; short Ultratech: Edelweiss Sec


The Nifty has fallen 173 points on Wednesday and Thursday combined, and many technical analysts are betting on the index to bounce back as it looks oversold.


Bhatnagar, however, feels any pullback in Nifty stocks cannot sustain as foreign investors are bearish on the market. FIIs were heavy buyers of Indian equities in December, January and February, pouring in an average of Rs 22,000 crore at the net level every month. But the flows dropped sharply to less than Rs 12,000 crore in March.


Bhatnagar says FIIs have created short positions worth Rs 2000 crore in the Nifty in the current derivative series. He says, there is visible build up of short positions in key banking stocks. However, traders don’t appear to be as bearish on the IT sector, evident from the lack of build-up of short positions.


Bhatnagar says there are short positions building up in Tata Steel, DLF and JP Associates.

Below is the verbatim transcript of Vineet Bhatnagar's interview on CNBC-TV18

Q: It has not shaped up like a good series, do you think there can be a pullback? Are you looking at lower levels on the index?


A: There is a great chance that we could see lower Nifty levels against our expectations. I want to bring out a dichotomy that we are seeing in the data in front of us. One is that, the capitulation number that we compute has a contrarian indicator for Nifty as a benchmark. To analyse whether this is going to give us a consistent opinion, we also looked at the components of Nifty, the big heavyweights of Nifty.


On one hand we are looking at a high reading for the capitulation index for Nifty, which is 1.44. Whenever we reach a number like 1.5, the market bounces back quite sharply.


We also carried out analysis at an individual Nifty component level. There we were faced with a greater pessimism because big heavyweights like Reliance Industries, ICICI Bank, State Bank of India (SBI), Oil and Natural Gas Corporation (ONGC), none of them showed similar pattern. The pattern would have given us a conviction of a more sustainable or a durable pullback.


In order to reconcile these two views, if the markets were not to crack immediately beyond 5,550, which is a strong support, the pullback will be perhaps shallow and will lead to fall of the Nifty level. It will then result in a consistent bottoming out for both the index and the heavy components simultaneously. So, if the pullback were to happen, it should be shallow.


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Q: In that case, what is it looking like for a positional trader? This is a big series and there is earnings packed into it. What kind of trading range or downside potential do you think the Nifty has through the course of this month?


A: Only in the last two trading sessions, the institutional investors have started switching their Put concentration that was earlier, at the time of expiration of the previous series, around 5,600-5,700 to as low as 5,300. So from yesterday, the new build up is happening at around 5,300 Nifty Puts.


However, at this point in time, the majority concentration is still at about 5,600 or 5,500 as the next strike. One would wait and see as to how this plays out as far as the institutional customers are concerned. It is worthy to point out that the FIIs as a customer segment have started adding on the short side for the Nifty in the last two trading sessions. Now, they are about Rs 2,000 crore short on the Nifty futures.

Q: Do you think that may work in the market’s favour if it gets a small trigger to pullback? Can the short covering bounce be stronger than what people are expecting right now and hence help the market a bit?


A: Yes. It is possible that the swiftness with which the smart money can start covering the short build up may result in a smarter pullback. One is only confused about what that trigger could be for people to change their view or sentiment.


Also, one should keep looking at the way the build up on the Nifty future side on SGX is, which is about 2 times of the open interest (OI) on the National Stock Exchange (NSE). It brings out the point that the interest on the Nifty future or the Indian market as a benchmark is still present. This is because one of the comments that I heard last week is the disinterest related commentary about India.


I do not think that for the traders or for the FIIs as a trading community, Nifty has lost interest because they are building a position on SGX, which is sizeable. They could be doing this, because of the currency, large current account deficit (CAD), their view on rupee and therefore take position on the dollar denominated Nifty elsewhere as against Indian rupee (INR) denominated one on NSE.

Q: What is your analysis of what FIIs have been up to over the last few days if you combine their action in the options market tying in with the selling done in futures?


A: It looks quite consistent that they were sellers in the cash market yesterday. They have added Rs 1,000 crore new shorts in the Nifty future yesterday. The option positions have moved down to a lower Put strike of 5,300 or at best shifting from 5,600 to 5,500. So, all this is tying in for the views they have for lower levels.


Q: What do you sense in the Bank Nifty and the bank stocks particularly from the futures market?


A: I don’t think there is any relief in terms of pull back that is visible at this point in time. I am specifically referring to the frontline banking stocks. There is short build up visible in most of the key banking names like ICICI, HDFC as part of the financials and even SBI. So, there is nothing in view that may come out as happy news.


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Q: There also seems to be a problem with the IT space, one of the few sectors that have been holding the index up. Do you see any short position there, what kind of trends have you seen on those faces?


A: IT is the only area where we have not witnessed any considerable short build up that would result in the reversal of what IT has been doing over the last month or so. So, that remains an area that could buck the trend. This is because of the outlook on the rupee, as a weaker currency pairs against economies that are important markets for some of the frontline stocks like Infosys being US as the primary market.

Q: How carefully are you tracking the recent spike in the India VIX and do you think that is a primer to where the market could be headed or there is further weakness coming?


A: We have always kept a track of the VIX, the underlying vols and the implied volatilities. While the volatilities have in general been subdued, when we compare the implied vols with the underlying realised volatility, it is sanguine about where the market is heading in terms of being lower and lower in the last few trading sessions.


Q: What kind of levels do you see it going down to, in this series? What strategy on the index are you therefore advising to your clients?


A: If 5550, which is the unanimous strong support that people have been talking about were to be taken off, I think the number that comes in is as low as 5320. As a strategy, we are talking about buying a straddle of 5600 strike by one put and one call of this particular strike. It works out to be a cost of about Rs 158. If one were to defray some of the cost, one could sell 5700 call.


Q: Are you not going to participate and expect a trade of a pullback of 100 points on the Nifty from here?


A: We think it could be shallow and could turn out to be a whipsaw. One is not clear whether the pullback that comes through, would last for a day or three or could just be for a few hours during a particular trading session. So, one is unclear on that. One is only looking at both the news related fundamental aspect of the local market place and also how the market is built up at least as far as the derivative segment is concerned.


Q: The problem is also the high beta universe and how that moves on a single trading session. Outside the index, are there any specific stocks that stand out and have an uncomfortably high short build up?


A: Not outside the index alone, but names like Tata Steel, DLF, JP Associates, Sesa Goa are looking like the ones that we spotted after yesterday’s trade as fresh short built ups. The only ones that we came across and seemed to buck the trend in terms of no new or additional short built ups are Coal India and Dr Reddys.


Q: What would change your view about the potential of a pullback for the market for it to cross a particular level? Do you see a change in the FII activity and whether they change their shorts significantly?


A: The later is more important than taking off new technical levels because that may not be long lasting. By long lasting, we are talking about just a few trading session rather than weeks and months. If one were to see a reversal in terms of how institutional investors that are key in terms of what direction the market could take were to be visible. For example, how they are behaving in the underlying cash, are they building new shorts or new puts at a lower strike and how are they adding positions to the Nifty futures segment is what will be the key.

Everybody is talking about a 200 DMA being broken down below 5620. So, if it spikes back to 5650 or 5700, will it respect the fact that a very long 200 DMA was just broken quite conclusively yesterday and today. That’s why we would look at whether it is supported by way of how the build ups are.

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